RBA says inflation outlook leaves scope for rate cut; agrees funding costs are higher for banks but that lending rates are at medium term averages

In its quarterly statement on monetary policy released today, the RBA said the combined 0.5 percentage point cuts in the official cash rate in November and December were driven by the improved inflation outlook.

The central bank also defended its decision to leave the cash rate on hold at 4.25 per cent earlier this week, given that prior cuts largely had been passed on to borrowers and lending rates were close to average.

The RBA sees underlying inflation hovering at around 2.5 per cent, which would "provide scope for easing monetary policy should demand conditions weaken materially".

The central bank said it would adjust the cash rate "as necessary to foster sustainable growth and low inflation".

The RBA also confirmed that banks were facing higher costs to source money – the key reason why the banks are warning that they may not pass on future official rate cuts in full.

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About Peter Ryan

Peter Ryan is one of the ABC's most experienced journalists. With more than 30 years in the game, he contributes to a range of ABC News programs including the flagship radio current affairs programs AM and The World Today in addition to ABC News 24 and ABC News Online. As a former ABC Business editor he established Lateline Business (now The Business) and Business Today in 2006 and oversaw the ABC’s business and economics coverage across all platforms. After working in the corporate sector, Peter rejoined the ABC in 2003 as Executive Producer of ABC Television’s Business Breakfast program. Peter's previous journalism career includes three years as the ABC's Head of TV News and Current Affairs in Melbourne; almost five years as Bureau Chief and television correspondent at the ABC's Washington Bureau; a year as a producer at the BBC in London and a range of ABC reporting and producing roles in Melbourne, Sydney, Darwin and the South Pacific. Peter began his journalism career in newspapers at Sydney's Daily Mirror in 1980 and he worked in Sydney commercial radio before joining the ABC in 1984.